Investing in a Real Estate Syndicate

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The syndication process is simply the aggregation of capital from a group of investors to acquire property.

Real estate syndications are seeing new popularity as real estate is increasingly viewed as a fourth asset class in
addition to stocks, bonds and cash.

Real estate investment trust (REITs), many of which have dividend returns of 6 percent or more, are an attractive way to
invest in real estate but their publicly traded shares are subject to a significant degree of price volatility that many
investors seek to avoid. By contrast, shares in a private syndicate, typically a real estate limited partnership (RELP) or
limited liability company (LLC), are not priced to market on a daily basis and in addition offer the possibility of higher
returns than publicly managed REITs. Finally, private real estate syndications offer some tax savings unavailable when
investing in a public company.

Advantages of Real Estate Syndication

While investing in a real estate syndicate has certain disadvantages as compared to direct ownership of real estate, syndicates do offer significant benefits. These include the following:

Access to real estate skills. The most obvious advantage of a syndicate is that the knowledge and
skills of a real estate professional are available to nonprofessional investors.
Real estate investment is a far more
complicated process than might appear at first, requiring skills in determining real estate values, negotiating purchase
agreements, financing a purchase, negotiating leases and managing the property.

Increased savings. By pooling the funds of a number of investors, even a small real estate
syndicate can achieve cost savings as compared to an individual investor. A well-capitalized syndicate can make a
substantial down payment on one or more properties while still retaining necessary cash reserves. In addition, other
things being equal, larger properties tend to be more cost-efficient than smaller ones, since many expenses are lower on
a per unit or square foot basis.

Diversification. A major advantage of syndication is that it enables an individual investor with
limited funds to diversify among a number of different properties. Diversification may well be the most important way to
protect against significant losses in real estate.

Tailor-Made Investment Positions. Finally, a syndicate can be structured to offer a variety of
"investment positions" that differ with respect to priority of return, risk of loss and tax benefits. Thus, an investor
can choose the balance of risk and return that best suits their wishes.

Cash Reserves. The need for cash reserves is often overlooked when inexperienced investors buy real
estate. Syndication can assure that sufficient capital is available to give the investment staying power, the ability to
withstand economic downturns or temporary shortfalls.

Beginning the Syndication Process

A major consideration to be addressed at the beginning of the planning process is the number of investors the sponsor intends to solicit. In most cases, a syndicate will consist of 10 to 50 investors, often known personally by the sponsor, who may be a real estate broker, attorney, accountant, or someone fully involved in real estate operations. In these cases, no elaborate marketing plan needs to be implemented. In addition, federal securities laws may not apply if the offering is within a single state or otherwise meets the requirements for an exemption. State securities laws may or may not be applicable. Professional counsel should be sought to assure compliance.

Multi-Class Syndications

In a typical real estate syndicate, the investors constitute a single class, each receiving a pro-rated ownership
interest in the syndicate. In some cases, however, in order to broaden the market for syndicate shares, the sponsor may
create a multi-class syndicate or paired syndicates. This permits the creation of different classes of investors, each class
entitled to a different type of return, just as corporate investors can choose among bonds, common stock and preferred
stock.

Three different approaches to the multi-class syndicate are: (1) different classes of interests within the same
syndicate; (2) fee/leasehold split in separate syndicates; and (3) equity/loan split in separate syndicates.

In the fee/leasehold approach, separate legal interests in the property are created - fee ownership and
a long-term leasehold. Two syndicates are formed. The syndicate owning the fee interest in
income property will be attractive to investors wishing to receive a secure
cash flow in the form of rent from the leasehold syndicate. The syndicate owning the leasehold then operates the property
directly or enters into a net lease with a high-credit tenant. Since no land investment is required, higher returns can be
generated but more risk is assumed since the ground rent must be paid in all events.

In the equity/loan approach, instead of a division of ownership between two syndicates, one syndicate
(for conservative investors) makes a mortgage loan to a second syndicate (of the equity investors) that owns the property.
The lending syndicate receives interest on its loan, which can include some form of participation in future income, while
the equity syndicate keeps the balance of income from the property and possible amortization payments as well.

Multi-class syndication is complex and must be expertly handled with regard to economic, legal and tax consequences. When
two syndicates are created, as discussed above, the sponsors must be sure that applicable federal or state exemptions will
not be defeated because the offerings are deemed to be integrated.